This project investigates the empirical relationship between the two major trends characterizing the healthcare industry over the past decade: managed care and integrated healthcare. The study has six objectives: (1) To describe the different integrative structures and practices that hospitals and physicians have developed to cope with managed care, (2) To estimate the impact of managed care penetration on integrative structures and practices developed between hospitals and physicians, (3) To estimate the effects of local market conditions on the integration efforts of hospitals and physiCians, (4) To estimate the differential impacts of private and public sector managed care penetration, (5) To estimate the effects of nearby urban managed care penetration on the hospital-physician integration efforts or rural providers, and (6) To assess the differential response of various types of hospitals to the development of managed care. The proposal develops a theory of response to managed care in which hospitals and physicians adopt internal and/or external strategies to cope with the growth of managed care. Internal strategies include: the use of salaried physician managers, information sharing, product line organization, more careful selection of medical staff members, and practice profiling. External strategies include: the use of joint ventures, and new physician organizational arrangements. The use of salaried clinicians, exclusive contracts, and assistance in recruitment and practice management are examples of strategies which span both internal and external approaches. The study tests this theory using data from a nationally and regionally representative stratified random sample of 1,495 U.S. community hospitals conducted for the Prospective Payment Assessment Commission in 1993. The empirical methodology makes use of a two-stage model of hospital-physician integration in which hospital level managed care penetration is treated as endogenous. The analysis is expected to yield one descriptive and four analytical papers. The findings will increase the understanding of current changes in the structure of hospital and physician services due to managed care. This will allow both market participants and public policy makers to more Clearly see the new environment for health care delivery, build upon its strengths, and ameliorate its problems.